Heron looks to share price re-rating on countdown to first zinc production near Christmas

Plus, Macquarie tips Kirkland Lake stock to ‘outperform’ thanks in no small part to its exceptional Fosterville gold mine in Victoria.
13th April 2018
Barry FitzGerald

Zinc prices have come off a touch from the 10-year highs seen in the opening months of the year. But at the current price of $US1.47/lb - more than twice its low in 2016 – there can be no complaints about the metal’s performance, one driven by the possibility of an actual physical supply pinch if the world’s official and hidden stocks continue their dramatic slide.

It goes without saying that it is good time to be a producer of the metal. But for investors wanting leveraged returns, a better strategy is to seek out a near-term producer from a fully-financed project that, because of financing delays when zinc prices weren’t so supportive, has had the benefit of being studied to the nth degree.

No prizes today for guessing Heron Resources (HRR) fits the bill to a tee as it pushes towards first production from its Woodlawn polymetallic mine (mainly zinc) near Goulburn in NSW by year end/early next year. First production will be a major re-rating event for Heron, which last traded at 67.5c for a market cap of $160m.

Assuming a smooth commissioning, the re-rating event could be something special as there is broad agreement that steady-state operations from Woodlawn should be good for annual EBITDA of about $100m at current metal prices. Euroz was one to cite that sort of potential in a recent note on Heron that came with a $2 a share price target.

Clearly, the market is not getting too excited just yet on Woodlawn. But that’s pretty much standard stuff during the construction phase of any project. And while there are good reasons to think zinc is going to hold on to these elevated levels for the foreseeable future, there are some doubters out there who reckon we should all plug in a long-term zinc price of say $US1-$US1.15/lb.

Maybe so, just as Heron did in its June 2016 feasibility when it assumed a long-run zinc price of $US1.01 and a US73c exchange rate. On that basis (copper, lead and gold assumptions were lower than current prices while silver was higher), total costs for Woodlawn were put at US34c/lb. The point there is the project is lowest cost quartile, or robust as they come, put another way.

History tells us that as Woodlawn was mined between 1978 and 1988 by the long-gone Denehurst. Low metal prices played a part in the closure, but the bigger reason was a lack of sustaining capital after Denehurst blew up over a dud coal deal. The records show that in every year of operation Woodlawn returned cash to the parent, and was close to break-even just ahead of its closure.

In its second coming under Heron, Woodlawn will process hard-rock ore from an underground operation beneath the old open pit (now a landfill/methane gas drainage project) and from tailings left behind by Denehurst. Importantly, the processing will be through two separate circuits, derisking the project in the event that recoveries in the tailings component do not live up to expectations.

Because of the initial difficulties in securing finance when zinc was down in the dumps, the project now being built is very much a starter project, with resources suggesting potential for at least a 20-year mine life. And while it’s a starter project, for a company of Heron’s modest market cap, Woodlawn certainly has some scale about it.

Steady state (gross) production has been forecast at 40,000t of zinc, 10,000t of copper and 12,000t of lead, along with some handy amounts of silver and gold.

Kirkland Lake Gold

Based on known knowns, none of the better-known gold producer names on the ASX present as having 15-20% price upside over the next 12 months.

But dig a little deeper as Macquarie’s research desk has done and up pops Canada’s Kirkland Lake Gold (KLA), the owner of the (now) fabulous Fosterville mine near Bendigo in Victoria, and a recent listing on the ASX through 1m CDIs at a 1:1 ratio to the Toronto head stock.

Fosterville has been a feature of Victoria’s small gold scene for 30 years and sent its early owners to the wall. But the more recent discovery of super high-grade shoots below the early oxide pits and shallow sulphide workings has made it one of the most valuable gold mines in Australia.

The increase in grade with depth thematic underpinned a recent reserve upgrade to 2.3moz at 23.1g/t gold. That included the fabulous Swan zone with its 1.2m oz at 61.2g/t.

Kirkland is working on increasing Fosterville’s production to 400,000oz annually from the 260,000-300,000oz expected in 2018, itself being a long way from the 135,000oz back in 2015 before the grade of the deeper sulphide mineralisation really took off.

In recognition that Kirkland’s listing here means an expansion of the ASX’s gold producer universe, Macquarie has just initiated coverage of the stock with an “outperform’’ recommendation and a $25 a share target price, the same figure as the its Canadian analyst has on the head stock, albeit in Canadian dollars.

“Kirkland remains a top pick for its high-quality underground mines and organic growth potential in good jurisdictions,’’ Macquarie said.

“With further drilling at Fosterville and more clarity surrounding the new shaft at Macassa (a high operation in Canada) we expect to see positive catalysts later in 2018/early 2019.’’

It expects the super high-grade Swan zone at Fosterville and a new shaft at Macassa to push Kirkland towards group production of close to 900,000ozs in 2023 compared with the group target for 2018 of more than 620,000 ozs at an AISC of $US750-$US800 an oz.

Trade in the local CDIs is super thin and the average Joe is better off getting their broker to pick up their Kirkland stock in the more liquid Canadian market where news of the Macquarie initiation saw Kirkland pop 6.8% higher to $C21.77 ($A22.3) on Wednesday.

A deeper market in the ASX stock is likely to develop over time as it could become a source of funding for Kirkland’s gold production ambitions in the Northern Territory. And who knows, there might be something in this market it wants to buy using its scrip.

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